3. There is a risk-free asset such that
Investors can borrow or lend unlimited risk free rate amounts. The risk-free rate is the same for all investors
4. The values are infinitely divisible. The amounts all assets are marketable and perfectly divisible. If an investor can acquire desired fraction of a share.
5. There is perfect information. Asset markets are frictionless; information has no cost and is available to all investors.
6. There are no market imperfections (such as taxes, laws, etc.). That is, taxes and transaction costs are irrelevant.
These cases show that CAPM is based on the tenets of microeconomic theory, where the consumer (the investor risk aversion) selected from indifference curves that provide the same utility between risk and performance.
2.2.3. This choice between risk and return
the investor takes on the one hand, to the formation of portfolios and the pursuit of portfolios that include, in addition to risky assets whose values is risk-free rate, and secondly to face a market for loanable funds must be in balance in every moment of time. Additionally, as any rational consumer, the risk adverse investor will seek to maximize the expected return on their assets and minimize risk. This behaviour of investors means that there is a unique set of portfolios that maximize expected return of an asset and minimize the risk; this series of portfolios are commonly referred efficient portfolios.
2.3. Separation theorem
Tobin (1958) integrates the term “risk-free asset” in the process of selecting investment when identifies the need for the investor to mitigate the uncertainty for future returns which the investor comes to a choice of safe investment. This selects specific proportion of their wealth to invest in the portfolio at risk (W1 W2 = 1) and the risk-free asset (W1); these proportions to invest reflected risk aversion.
In the original version of their investigation, Tobin (1958) considers as a risk-free asset yields and zero variance, so any portfolio formed by him and have as risky asset performance:
R= W2 (R2 +g) +W1 (0) 0 < W2 < 1; W2 =1– W1